The tax advantages of resetting shares to their market value

Question

I don’t understand the concept of selling shares to crystalise capital profits prior to the introduction of the $1.6 million cap. Why would this need to be done, as the shares are shown at their market value each year and as a result the gains have already been recognised?

Answer

Just because the shares held in an SMSF are shown at their market value each year does not result in the gain being recognised for tax purposes. The increase or decrease in the market value of shares results in an unrealised gain or loss that does not affect the tax paid by a super fund.

This means if the shares in your fund had a cost of $500,000, and over time have been revalued to a market value of $1m, your fund has unrealised capital gains of $500,000. The strategy to sell shares while still in pension phase, before assets are allocated to an accumulation account due to exceeding the $1.6m pension transfer cap, would result in a tax-free gain being made.

Thankfully, the legislators when drafting the legislation introducing the $1.6m pension transfer balance cap included capital gains tax concessions. The CGT concessions mean, where a member has to transfer assets back to accumulation to reduce their pension account balance to below $1.6m, the member can choose to have the value of the assets reset to their market value at that time.

This means the strategy of selling shares while still in pension phase is not necessary. As a result of the CGT concession, the shares in a fund transferred back to accumulation will have protected any unrealised capital gain that has built up over the time the shares were held.

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